An accounting system is an essential part of any business. In this lesson, learn about the advantages and disadvantages of a manual accounting system - one that is maintained by hand.

What Is Manual Accounting?

How do you balance your finances? Do you get a pen and paper and write everything out, or do you use a computer? Which method would be the best method for you? Businesses ask themselves the same question.

Like you, a business has the option of using a manual accounting system, keeping their financial records by hand. A business also has the option of using a computerized accounting system, keeping their financial records with the aid of a computer and software package. This lesson focuses on a manual accounting system.

Who Uses It and Why?

Manual accounting systems are most commonly used by small businesses, as these systems have lower upfront cost less than complex accounting software and are relatively easy to use. New or small businesses may not have many financial entries to make and, therefore, their accounting needs are simple. As long as the person in charge of manually keeping the financial records knows what he or she is doing, it can be just as accurate as a computerized accounting system. Another advantage of using a manual accounting system is that you can always open up the book and gain instant access to your records. There is no delay due to power or Internet outages, and there are no risks of sensitive information being hacked online.

Disadvantages

There can be many disadvantages of using a manual accounting system. Accounting, for any business, can be a complex undertaking. A manual accounting system requires you to understand the accounting process in a way that may be unnecessary with a computerized accounting system. This can be an advantage or a disadvantage, depending on the person doing the bookkeeping; often, a specially trained professional is needed to ensure that accounting is done properly.

Unraveling the complexity of your financial records by hand may be time consuming. Since it takes time to generate reports, you may be neglecting other aspects of the business and miss opportunities for growth. Human error also plays a role in inaccurate financial records; manual accounting can be tiresome and tedious, causing bookkeepers to make mistakes. Additionally, records may only be available in paper format, which can cause issues if they are lost, stolen, or damaged.

Types

Many things must be accounted for when it comes to bookkeeping: debits and credits, utility bills, rent payment, inventory, financed equipment, and monthly payments, among others. Where does all the data go? Businesses use one of two types of accounting systems to record financial data. Either a single-entry system or a double-entry system can be used.

A single-entry system, in which only one entry is made for each financial transaction, is the simplest form of accounting. This is generally a good method for small businesses with few transactions and assets. Imagine you owned a small business that had just purchased a new cell phone. Using the single-entry system you would record the financial transaction once in your ledger as a debit of $50 with a date and a notation that it was spent on a cell phone.

A double-entry system is more complex than the single-entry system and can be used for any business that needs a more in-depth financial analysis. It records each financial transaction at least twice. Financial transactions must be entered as a debit and as a credit. This is based on the duality principle, an accounting concept that recognizes a financial transaction has more than one impact.

For instance, in a double-entry system, the same business owner as above would record the $50 for a cell phone as a credit in the asset section of their ledger. It would also be added as a debit in the liability section for the cash they spent on it. This dual entry allows businesses to check for errors, as both debit and credit sides must balance.

Lesson Summary

Let's review. There are two types of accounting systems:

Manual accounting system: a system that is kept by hand

Computerized accounting system: a system that uses the aid of computers

There are two types of entry in the manual accounting system:

Single entry system: a simple accounting method used for small businesses, which records financial transactions in a single entry.

Double entry system: a complex accounting method based on the duality principle and used for any business that needs a more accurate financial analysis. It records financial transaction as both a debit and a credit.

Small businesses are more likely than large firms to use manual accounting systems for several reasons:

Cost efficiency

Accounting process is simple

Few entries need to be made

There are several disadvantages of a manual accounting system, including:

Summary:

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